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Yahoo, eBay Join Forces to Fight Google

Yahoo and eBay recently announced a wide-ranging agreement aimed at helping them in their never-ending battle for market share against search engine powerhouse Google. Who will benefit? And do they have a hope of succeeding? Keep reading to find out more.

Rumors that surfaced a while ago – later confirmed by both companies – that Microsoft was in talks with Yahoo to purchase the venerable search engine brought into focus just how cutthroat the competition in the search engine field had become. Those talks fell through, but that doesn’t mean the companies competing, or expecting to compete, against unstoppable search engine Google felt any more secure. Case in point: the recently-announced partnership between Yahoo and eBay.

Don’t get me wrong; the deal makes a lot of sense, and has a lot to recommend it, as I’ll be explaining in just a bit. And unlike the Microsoft-Yahoo rumors, the partnership certainly stops short of an outright merger. (On the other hand, with Yahoo Chief Financial Officer Susan Decker refusing to comment on the possibility of a merger with eBay, anything could happen). But I think it was clearly born of two firms running more than a little scared when facing an apparently unbeatable foe, and deciding that there had to be more strength in numbers.

eBay and Yahoo aren’t alone in feeling that way, which is why I think you can expect to see more of these deals in the future. (In fact, when I look at Ask.com and don’t see the company making these kinds of arrangements, it makes me wonder how serious they are about competing in the field). If the agreement between eBay and Yahoo is any indication, these deals will aim for areas in which Google is somewhat less strong, or on which Google has not focused quite as much effort.

An Internet search engine and an Internet auction site wouldn’t seem to have enough common ground to strike up a partnership on the face of it, but of course Yahoo and eBay are far more than that these days. This is why the deal is so wide-ranging. But I’ve been getting way ahead of myself; let me back up and talk about the actual terms of the agreement.

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There are four points to the multi-year strategic partnership. The areas covered include search and graphical advertising, online payments, a co-branded toolbar, and “click-to-call” functionality. As with any good partnership, it looks like each side is bringing equal resources to the table, and both sides will probably benefit about equally. I’ll cover the first two areas in this section, and the next two in the next section.

First, let me touch on the search and advertising element. Yahoo will become the exclusive third-party provider of all graphical advertisements throughout the eBay.com site. With the search engine company having just recently finished upgrading its advertising system with its Project Panama, this comes at an excellent time.

Additionally, the two companies are going to work together to improve the quality and comprehensiveness of Yahoo web search results for eBay.com. This could be a major win for Yahoo, depending on how it is implemented. eBay historically has not wanted search engines to crawl its site, at least not for the sake of returning actual auction listings. The Internet auctioneer prefers to have users come to its website to conduct their searches. If Yahoo were suddenly permitted to do the kind of “deep linking” that other engines can’t, that could be quite a competitive advantage. (eBay, of course, would gain the advantage of having a lot more people who do search for a living in their corner).

Next I’ll cover online payments. Many of us still think eBay buying PayPal was one of the smartest things the auctioneer ever did. PayPal is used for a lot more than buying Beanie Babies these days, though its most prominent usage continues to be online payments of various kinds. Consequently, as part of the agreement, PayPal will become the exclusive third-party provider of Yahoo’s online wallet. This will allow customers to pay for Yahoo services from bank accounts, credit cards or balances associated with their PayPal account.

Right off the bat, this means 73 million people in the U.S. alone can purchase Yahoo services more easily. PayPal has an international reach, so there are actually many millions more for whom this works. Incidentally, the services covered include Yahoo’s small business and advertising services – so yes, you will now be able to pay for your search engine advertising through Yahoo with your PayPal account. Google doesn’t offer that option; for those who prefer transacting business through PayPal, that gives Yahoo a competitive advantage.

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Next we come to the co-branded eBay toolbar. I’m probably showing how inactive I’ve been on eBay when I admit that I didn’t even know that eBay had a toolbar. But it does, and it’s been downloaded more than four million times. Thanks to this part of the Yahoo-eBay agreement, that toolbar is going to be enhanced with Yahoo web search functionality and Yahoo site links, including the Yahoo home page, Yahoo Mail, and My Yahoo.

To me, this looks like a bigger win for eBay than Yahoo, particularly if the co-branded toolbar gets promoted on the search engine’s website. Yahoo has its own toolbar; while I couldn’t find out how many times it’s been downloaded, I’d be willing to bet it’s a lot more than four million. It would be interesting to see whether, somewhere down the road, Yahoo’s toolbar gains some special eBay functionality (such as the ability to search for items specifically on eBay, or go directly to My eBay, or monitor specific auctions).

The fourth aspect of the strategic partnership focuses on click-to-call functionality. The two companies will work together to develop and deploy click-to-call advertising technologies on their respective websites in the U.S., accessible by users of both Yahoo Messenger with Voice and Skype. For those who might not be familiar with the technology, click-to-call is a product feature link included inside an ad that users can click to directly call the advertiser.

It’s really hard to tell what to make of this aspect of the deal. I can see that eBay is clearly working hard to monetize its purchase of Skype. But I admit, when I heard about that purchase, I just sort of stared and scratched my head. What was eBay thinking? I know, the companies kept talking about making it easier for buyers and sellers in auctions to communicate, and I’ll even grant that Skype recently passed the 100 million registered users mark. Even so, it’s really hard to look at the Skype purchase and see it as having been a reasonable move for eBay.

On top of that, click-per-call hasn’t exactly taken off yet. It was introduced with a certain amount of fanfare, and widely predicted to become popular with advertisers for products that require a “human touch” to sell well. But I haven’t heard much about it lately, and it seems to have faded into the background. This doesn’t mean that it can’t be successful, but it remains to be seen what approach to it Yahoo and eBay will take, and whether it will work any better than what has already been tried.

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Speaking about the strategic partnership between Yahoo and eBay, Susquehanna analyst Marianne Wolk told Reuters that “It’s a very positive move for both, since eBay gets to monetize its traffic with advertising. For Yahoo, it significantly broadens” the search engine’s audience.

So how would Yahoo advertising work on eBay? That could get touchy, because eBay certainly wouldn’t want to offend its sellers by running Yahoo ads that compete. But if a hopeful buyer couldn’t find what he or she was looking for through a search on eBay, perhaps a Yahoo ad could pop up which points to the item.

That gives Yahoo a tremendous advantage, as anyone who has ever gotten into the spirit of hunting for stuff on eBay can attest. “Clearly Google and Microsoft, I assume, would have liked this business,” observed Mark May, an analyst with Needham & Co., “but Yahoo has more assets to leverage in a partnership with eBay.”

There is another touchy aspect to this deal that is worth noting. eBay may have a rabid following, but it makes use of paid search ads in all three major search engines to drive users to its website. The online auctioneer is no stranger to bidding; it buys ads for up to 15 million keywords.

In fact, eBay is in a potentially painful position right now: it needs to buy advertising from a company it thinks will become its biggest rival (Google), and it has just made a major deal with the enemy of its enemy, so to speak. That dependence on Google advertising isn’t going to go away overnight; indeed, it’s likely to get worse before it gets better. While the alliance may make both Yahoo and eBay stronger competitors, it may need to go further before it becomes effective. To win at this game, Google’s competitors need to take away its crown as the place to go for online search (and therefore advertising). Whether the agreement offers enough advantages to accomplish this for Yahoo and eBay remains to be seen.